Hi, this is Andrea Dudik in Prague. Welcome to our weekly newsletter on what’s shaping economics and investments from the Baltic Sea to the Balkans. You can subscribe here.

Power Struggle

For his first foreign trip as Polish president, Karol Nawrocki’s meeting with his ally in the White House went pretty well. Donald Trump called the US’s relationship with Poland “very special” while Nawrocki welcomed the possibility of more American troops in his country. For the government back in Warsaw, though, the relationship with Poland’s new head of state is anything but special.

Nawrocki has turned out to be a vocal and awkward critic of Prime Minister Donald Tusk, who is struggling to keep up with the expectations placed in him by voters two years ago. Nawrocki, backed by the nationalist opposition Law & Justice party and endorsed by Trump, is actively derailing legislation with his presidential veto on everything from aid for Ukraine to tackling the budget deficit.

Poland is the linchpin of the region. A staunch supporter of its war-torn neighbor, the country is NATO’s biggest defense spender relative to the size of its economy and gross domestic product just topped $1 trillion for the first time. Indeed, Nawrocki said Trump invited him to a G20 meeting next year. The question is how far the domestic power struggle could end up undermining the success.

As my colleagues Agnieszka Barteczko and Maxim Edwards report, one government official expressed concern that a deepening sense of legislative chaos might spook investors and make it hard for Poland to attract financing for big investment projects.

The government is also concerned about the impact of the clash with Nawrocki on public finances, according to a person familiar with the situation. The president opposes tax increases, which the government assumed in next year’s budget to at least partly balance the increased spending on military equipment. The central bank cut interest rates for the third time in five months this week, but flagged the inflationary risk of looser fiscal policy.

Trump has made it clear that when it comes to Polish leaders he prefers Nawrocki over Tusk. According to observers in Warsaw, the president’s role is now to ensure Law & Justice returns to power in 2027. And Trump will still be in office.

Nawrocki and Trump watch a US military flyover during an arrival ceremony at the White House on Sept. 3. Photographer: Aaron Schwartz/CNP

Around the Region

Czech Republic: The eldest child of the late tycoon Petr Kellner cemented his place among Europe’s richest heirs after he agreed to sell his 10% stake in investment firm PPF Group to the rest of his family.

Slovenia: In an interview with Bloomberg, President Natasa Pirc Musar pledged to revive the process of installing a new central bank chief before elections next year.

Ukraine: Military equipment maker Fire Point plans to open a facility in Denmark, becoming the first Ukrainian defense company to start production in a Nordic country.

Hungary: The government kicked off a new subsidized mortgage program, which Prime Minister Viktor Orban is counting on to reverse a poll slide before next year’s election. 

Romania: The coalition government is under renewed strain after Prime Minister Ilie Bolojan warned that disagreements over a public administration overhaul risk derailing a wider fiscal reform package. 

Chart of the Week

Montenegro is lobbying European Union leaders to allow the Balkan nation to join the bloc and officially enter the eurozone by 2028. In an interview this week, President Jakov Milatovic said it would be “optimal” to do both at the same time. That’s not least because the tiny country of 600,000 already uses the currency, albeit unilaterally. After the collapse of Yugoslavia, it first used the deutsche mark and then the euro arrived. 

By the Numbers

• European leaders are increasingly concerned that Russia will mount a new offensive as President Volodymyr Zelenskiy seeks security guarantees. Last week, he said that Russia had relocated 100,000 soldiers to the frontline outside the city of Pokrovsk. 
• The Czech central bank was right to bring interest rates down to 3.5%, but policymakers must avoid repeating the mistake of holding borrowing costs too low for too long, according to Governor Ales Michl.
• Meanwhile, the Czech government is proposing to increase the budget deficit next year to 286 billion koruna ($13.7 billion), about 19% more than the limit approved for this year. 

Things to Watch

• The European Central Bank can afford to keep interest rates steady next week as inflation hovers close to its target and the economy shows resilience, Estonian central bank chief  Madis Muller said. In a separate interview, Slovenia’s Primoz Dolenc said he doesn’t see “major shifts in any direction” to justify changing borrowing costs this month. Both are on the ECB’s Governing Council.
• London will host a meeting of the Ramstein Group that provides military support to Ukraine.
• No-confidence votes against the governments in Romania and Bulgaria are expected to fail.

Final Thought

In China this week, all eyes were on Russia’s Vladimir Putin and North Korea’s Kim Jong Un lining up alongside President Xi Jinping to commemorate 80 years since Japan’s surrender in World War II. It was the first time since the height of the Cold War that leaders from the three countries stood together during a military parade. But the rest of the guest list also made interesting reading, just as European leaders were preparing to convene in Paris to discuss backing for Ukraine. Compared with a decade ago, absent in Beijing were Poland and the Czech Republic. Present were Serbia and Slovakia. Hungarian sinophile Viktor Orban dispatched his foreign minister. Two former Romanian prime ministers also showed up, as did two Bulgarian officials. Their governments, though, quickly declared they had nothing to do with the trips.

Leaders are displayed on a screen in Tiananmen Square at the once-a-decade military parade on Sept. 3.  Photographer: Qilai Shen/Bloomberg

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